How do student loans impact my credit reports and scores?

Some people have not taken their student loan obligations seriously and are now paying the price for NOT paying the price. Under most conditions student loans are not forgiven and can’t be included in a bankruptcy.  They can also hang out on credit reports much longer than normal defaulted debt.

How are student loans considered in my credit score?

Student loans are considered an installment loan, which is the same category that includes mortgages and auto loans.  If the loan is deferred, it is still reported on your credit report and is classified as “deferred student loan”, which is considered in your credit scores.  There is no credit limit reported on a student loan. If you default on the loan, the negative information will stay on your credit report for 7 years from the date you pay the loan.  That’s very different than a normal delinquency, which remains on file for 7 years…paid or unpaid.

Student loan payments not made for 270 days are considered to be in default, unless arrangements are made with the lender. For Department of Education loans, as soon as they are in default they are due immediately and cannot be deferred.

What recourse does the lender have if you default on student loans?

• Tax refund – The IRS can take your federal income tax refund until the loan is paid. This is the most popular method by the U.S. Department of Education. You state income tax refund can also be taken.
• Paycheck garnished – They can take 15% of your disposable income.
• Suit – Government and private lenders can sue you.
• Federal Aid – If you want to return to school, you can’t qualify for Federal Aid until you pay student loans satisfactorily.  This may take a full year of on-time payments.
• FHA or VA loans – You are not eligible for federal loans such as FHA or VA loans until your loan is paid.
• Statute of limitations – there is no statute of limitations on the age of the student loan debt regarding repayment.
• Social Security – The Department of Education can take Social Security retirement benefits and Social Security disability benefits.  They can’t take more that 15% of your total benefit or more than $750 per month.

The Health Care and Education Reconciliation Act of 2010 went into effect on July 1, 2010 and made changes to federal student loan financing and paying them back, but doesn’t apply to loans prior to that date. There is a provision in the income-based repayment plan that applies to those with government student loans.  If your total student loan debt is the same or greater than your annual salary, you may pay less than 15% of your income. If you are earning below 150% of the poverty line, you will pay nothing until your finances improve.

For some students, the student loan may be the only account on their credit report.  It is important to make sure you comply with the terms of this loan.  Student loans are to be taken seriously and you should make every effort to pay them or contact the lender to make arrangements.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Getting Credit, Money & Identity

This post was written by John Ulzheimer